annual management conference at Lake George, N.Y., the week of July 4. But between the early-morning breakfasts and evening cabarets, anxiety was running high. There was talk of Pepsi's mediocre earnings--and, too, of layoffs and high-level executive shuffling.

The scuttlebutt has been mounting since June 9, when Pepsi warned Wall Street that second-quarter earnings, due out July 19, would be flat with last year's 53 cents per share. For Pepsi, which had declared a goal of 15% earnings growth, the news was practically heresy. Its stock dropped 9%, to 311/2, touching off declines in other consumer-goods stocks. Pepsi "truly spooked investors," says Emanuel Goldman, a PaineWebber Inc. analyst.

PRIVATE-LABEL SQUEEZE. Rumors of heads rolling soon followed. PepsiCo Chairman Wayne Calloway, went one, would be replaced by former Philip Morris Cos. CEO Michael A. Miles. Craig Weatherup, CEO of Pepsi-Cola Co., the company's flagship U.S. beverage division, and John M. Cranor III, CEO of KFC, were said to be out. And Jeff Campbell, Pepsi-Cola's senior vice-president for brand development, was rumored to be leaving to become a business school dean.

So far, only Campbell's departure has actually transpired: The marketing executive resigned July 11, replaced by Brian Swette, a 40-year-old Pepsi fast-tracker. Meanwhile, Mike Miles says he's not making any moves until September, and spokespersons for Calloway, Cranor, and Weatherup denied those executives are departing. But in the face of flat earnings and mature markets, investors expect more changes.

What's gone wrong at the onetime perennial growth machine? Earnings at Pepsi's three restaurant chains--Pizza Hut, KFC, and Taco Bell--which made up 25% of the company's $3 billion in profits in 1993--have taken a beating. International operations are sluggish. And the core beverage division is being squeezed by private-label rivals (table).

In many ways, Pizza Hut embodies the worst of Pepsi's problems. Hit at once by fierce price competition from take-out rivals Little Caesar Enterprises Inc. and Domino's Pizza Inc. and pressure from value-oriented family chains, Pizza Hut's operating profits dropped 15% in the first half. Even as a $60 million marketing push built its oversized Bigfoot pizza into a hit, eat-in restaurant sales dropped to 25% of the chain's revenues from 33% in 1990.

Pizza Hut's response: adding sandwiches and pasta entrees to broaden its menu and introducing "value meals" to lower the average bill to $5 a person from $7. But "it's going to be an uphill struggle," says Piper Jaffray analyst Allan F. Hickok. And analysts also expect profits at KFC and Taco Bell to be flat for the quarter. KFC's new nonfried Rotisserie Gold chicken has brought in health-oriented customers but has cannibalized sales of the chain's other products.

BEVERAGE BATTLEGROUND. Pepsi's other big problem: Overseas beverage operations have expanded rapidly without generating big profit increases. Christopher A. Sinclair, who heads the international beverage and snacks unit, says: "I wouldn't rule out getting 80% of our operating income from overseas operations" someday, as Coke does. But Pepsi's international cola profits will be down 9% in the second quarter.

Meanwhile, Pepsi-Cola isn't exactly soaring in the U.S. Domestic beverage earnings will be up 8% this year, says Goldman, Sachs & Co.'s Marc Cohen, but the U.S. soft-drink business remains a battleground. Although Diet Pepsi supermarket sales jumped in June with its "freshness dating" campaign, the inroads made by the private-label sodas haven't allowed Pepsi--or Coke--to hike prices.

How does Pepsi calm investor jitters? Some hope that the board, which includes former General Motors boss Roger B. Smith and former IBM Chairman John F. Akers, both Establishment icons, will take steps to increase shareholder value. "The key question for Pepsi management is, what are they doing for shareholders?" says Mark Kastan, an analyst at J&W Seligman & Co., which recently sold off 1.6 million Pepsi shares but still holds 1.7 million. Historically, he says, Pepsi's "attitude is, `Put out the numbers or find a new job."' Just now, the numbers aren't going Pepsi's way.

THE PEPSI DEGENERATION

PEPSI-COLA

First-quarter profits dropped 4% at the flagship beverage company, thanks to competition from low-cost rivals and the Coke juggernaut.

PIZZA HUT

Its delivery business is booming, but its eat-in restaurants have suffered from neglect. Now,

same-store sales are drooping.

KFC

Rotisserie chicken helped the chain post 5% U.S. same-store sales increases in the first quarter. But operating margins remain under pressure.

TACO BELL

The introduction of "value meals" in 1988 sparked big growth at the Mexicanesque chain. But same-store sales growth is slowing.

FRITO-LAY

PepsiCo's one problem-free division. The $5 billion operation owns more than 50% of the U.S. chip market and is making gains overseas.Laura Zinn, with Jonathan Berry in New York and Greg Burns in Chicago